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Colgate (CL) Looks Good: Should You Hold on to the Stock?

They say that “All that glitters is not gold.” So, does it imply that all that is not glittering could also be gold? Think about it.

Taking a look at consumer staples bellwether – Colgate-Palmolive Co. (CL - Free Report) , we note that this Zacks Rank #3 (Hold) stock has dipped 0.3% on a year-to-date basis, as against the Zacks Categorized Soap and Cleaning Preparations Market growth of 0.01%. Though in the red zone, we still believe that one can hold on to the stock for the time being as it offers solid long-term prospects, and a prudent investor must keep the long run in mind.

Growth Drivers

Colgate is well placed given its continued focus on product innovation, along with globally recognized brands and presence in both developed and emerging economies, which enable it to tap growth opportunities and boost profitability. Further, the company’s international brand recognition and innovative strategies underscore its inherent strength.

Further, Colgate is leaving no stone unturned as it continues to progress well with its savings programs, with both its Global Growth and Efficiency Program or 2012 Restructuring Program and Funding the Growth undertakings reaping results. These programs are aimed at reducing structural costs, standardizing processes, opening new distribution centers, improving decision making, enhancing market share and thereby contributing significantly to the improvement of gross and operating margins over the long term.

The effect of these cost savings plans was evident from the gross margin growth witnessed in third-quarter 2016, which also exceeded the milestone 60% mark that was achieved recently.

Further, the company continued with its meet or beat trend for the fifth straight time in the third quarter, wherein its earnings came in line with the Zacks Consensus Estimate and improved year over year, despite threats posed by currency woes and challenging economic conditions. In fact, the bottom line rose by double digits on a currency-neutral basis while organic sales grew 4.5%.

Additionally, Colgate has always followed a disciplined capital allocation strategy that focuses on making investments to develop business, while using the excess cash to enhance shareholder returns through dividend payouts and share buybacks, thanks to its strong cash generation ability. This underscores its financial flexibility, which should definitely draw investors’ attention.

However, the company continues to battle lingering currency woes as nearly 75% of its business is generated outside the U.S. In fact, the currency challenges are expected to bear a negative impact on full-year 2016 sales as well. Further, stiff competition remains a threat for the company.

Nonetheless, even in the face of these challenges, the company expects another year of robust organic sales growth on the back of new products across categories and geographical regions. This encouraged management to retain its 2016 outlook.

Dean Foods’s earnings have outperformed the Zacks Consensus Estimate by an average of 5.4% in the trailing four quarters. Moreover, its long-term EPS growth rate of 12% and positive estimate revisions over the past 30 days bode well.

Ingredion Incorporated, with a long-term EPS growth rate of 11%, has seen positive estimate revisions for 2016, over the past 30 days. The company also flaunts a solid earnings surprise history.

Lancaster Colony has posted positive earnings surprises consistently for three quarters now. Also, the company has seen its estimates move north in the past 30 days.

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At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +25% per year. These returns cover a period from 1988-2016 and were examined and attested by Baker Tilly Virchow Krause, LLP, an independent accounting firm. Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. The monthly returns are then compounded to arrive at the annual return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Zack Ranks stocks can, and often do, change throughout the month. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations.

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